Juice Portfolio Gains With Put Selling
I’m about to reveal one of the best kept secrets on Wall Street…
It’s something the vast majority of investors don’t know about. But it’s easily one of the safest ways to earn income in the market today.
To be clear, I’m not talking about collecting stock dividends or interest from bonds.
Those income strategies play an important role in your portfolio. I’m referring to something different.
What I am talking about is a safe way to collect on-the-spot income with the stocks already in your portfolio…
Even if they don’t pay dividends.
You see, most investors believe that the only way they can earn income on their stocks is if a company’s management is gracious enough to share its profits with them, the common shareholders, through dividends.
But that’s not quite true.
The truth is that millions of investors – especially retirees – could earn hundreds, thousands and even tens of thousands of extra dollars in annual income…
And best of all, it’s one of the safest strategies you can use.
Juice Your Returns… Safely
The strategy I’m about to outline has two key advantages.
First, it allows you to collect on-the-spot income. I’m talking about immediately earning money on the stocks you own – not waiting for a special payout date.
Second, this strategy is an easy way to supercharge your gains on stocks. In fact, it consistently outperforms a strict stock-only strategy (as you’ll soon see).
So now that you know about the benefits, let’s get right to it.
The strategy that I’m talking about involves put selling.
Fancy wording aside, all it entails is selling put options on stocks – in this case, stocks you already own – in order to collect instant income.
As I said earlier, it’s one of the safest ways to make extra money… because you can use this strategy without taking on significant risk.
How? By using it on low-risk blue chip stocks (although this strategy may be applied to any stock with an options market).
Let me illustrate the strategy by showing you a model portfolio of blue chip stocks.
These are stocks found in a typical retirement portfolio.
These stocks have done quite well this year. But you could have done even better with a simple put-selling strategy.
Here’s how it works…
Take any stock in our portfolio and look at the stock price. Then search for a put option with an expiration date about a year out and with a strike price 20% below the current stock price. For example, for a stock trading at $125, look for a strike price near $100.
Place a sell order for that option… collect the income… and you’re done.
Again, this strategy works best when you’re dealing with blue chips. But it may be applied to any stock in your portfolio with an options market.
Now, returning to our model portfolio, I’ll show you how you would have performed had you used this simple put-selling strategy.
Our first example is Coca-Cola (NYSE: KO). As of this writing, the stock has booked a 9.9% gain so far this year. That’s a respectable return for a blue chip consumer staples stock… but you could have done even better.
At the start of the year, Coca-Cola was trading at just under $45. If you had sold a put option with a strike price of around $35 for a year out, you could have collected an extra $43 per option contract. And if you include that income with your capital gains, that’s a total return of 10.8% for the year.
Not a bad boost.
Next, let’s look at Microsoft (Nasdaq: MSFT). It’s booked a 27.6% gain year to date.
But a simple and safe put-selling strategy could have juiced those gains.
Microsoft began the year trading at about $85. You could have sold a put at a strike price of about $65 and walked away with an instant $141 per option contract. That would have juiced your year-to-date return from 27.6% to 29.2%.
Now that you get the picture, here are numbers for the rest of our model portfolio.
This strategy is exceptionally low-risk and straightforward, but it’s not without a down side.
Keep in mind that you’re selling something here. On the other side of that transaction is a buyer.
What they’ve bought is the right to sell you shares of that company at the strike price if the stock’s price drops below it.
In that case, you would have to buy those shares at the strike price. But it’s really not all that bad.
If you’re using this strategy on stocks you already hold… and presumably like… then you’ll end up buying those same stocks at a cheaper price.
That’s not a bad deal. It’s why I like this strategy so much.
Even if it fails, you can still win.